Written Evidence from Funding Circle UK

 

Executive Summary

 

Funding Circle is pleased to provide written evidence to the House of Lords EU financial committee on the future of financial services post-Brexit.

 

The UK is currently well-established as a world-leading financial services centre, and a global hub for FinTech. As the UK’s leading—and one of the world’s largest—online lending platforms for small businesses, Funding Circle is playing a key role within this vital sector. By allowing investors to earn attractive returns by lending directly to small businesses, we are helping expand access to financial services, and we are proud of the contribution we make to the UK economy. Economic research has shown that in 2018, lending through the Funding Circle platform alone supported approximately 72,000 jobs in the UK, and for every £1 lent, £2 was contributed to the UK economy.

 

Now the UK has left the EU and looks forward to negotiating a new trading relationship, we welcome the Committee’s focus on examining the challenges and opportunities this process has and will present to our business. In this response, we have outlined: our assessment of the impact Brexit has had on our business to date; our priorities for post-Brexit policymaking; and our views on the extent to which regulatory divergence or alignment with the EU will impact our industry and business.

 

We hope this response is informative and we would be pleased to provide further information and evidence to the Committee.

 

Introduction to Funding Circle

 

This document will give a brief introduction to Funding Circle before addressing the various issues referenced by the committee:

 

1.      Funding Circle is one of the world’s largest online lending platforms for small businesses. We were founded in 2010 in the aftermath of the financial crisis, when banks significantly reduced small business lending. We wanted to create a platform where any investor – big or small – could lend directly to small businesses. In 2018, we became a public company when we floated on the London Stock Exchange. Funding Circle now operates in the UK, US, Germany, the Netherlands.

 

2.      A wide range of investors are earning attractive returns by lending directly to small businesses through our platform, and in the UK alone we have helped to channel £5.8 billion of lending to more than 54,000 UK small businesses as a result. Investors include more than 80,000 people, the Government-owned British Business Bank (BBB), the European Investment Bank (EIB), local councils and financial institutions such as pension and insurance funds. We are regulated in every jurisdiction in which we operate, and in the UK, we are fully authorised and regulated by the FCA.

 

3.      Funding Circle offers a fundamentally better service to small businesses looking to access finance, as well as offering attractive returns for investors. Helping to connect small businesses with the finance they need to grow through our platform also has a significant impact on the UK economy:

 

a.      Funding Circle works for small businesses: our platform offers a fundamentally better service for small businesses. Operating online and using cutting-edge technology to streamline our processes, means businesses get a faster, more flexible, more transparent service. We know this works for businesses because 90% say they will return to us again for further finance, rather than go back to their bank.

 

b.      Funding Circle works for retail investors: lending directly to businesses allows retail investors to invest as little as £1000 and earn attractive returns, opening up an asset class - SME loans - which was previously only accessible to banks. Loans taken out since 2012 are projected to return c. 4-7% annualised after fees and bad debt, while investors have earned more than £307m in net interest. But it is not just the SME loan asset class that makes Funding Circle suitable for retail investment, our product has evolved to ensure that retail investments are diversified, further reducing the investment risk.

 

c.       Funding Circle works for the economy: Funding Circle is helping to stimulate the real economy by channelling finance to the companies that have an impact. Research estimates that for every £1 lent, £2 is contributed to the economy. In 2018 alone, it’s estimated that Funding Circle loans supported the creation of almost 72,000 jobs in the UK, contributed £4.1 billion to the UK economy and £1 billion in tax receipts.

 

Impact of the Brexit process on our business to date

 

We welcome the steps the government had taken to prepare our sector for the immediate impact of leaving last year; including the onshoring project and Financial Services Bill. As a result, we are broadly prepared for the end of the transition period. For example, both our private funds domiciled in Ireland are registered under the temporary permissions regime to ensure they would still be marketable in the UK under a “no-deal” scenario, and we’re helping EU citizens working in our UK office to apply to the EU settlement scheme.

 

Our post-Brexit policy priorities

 

Although we operate in four countries—The UK, US, Germany and the Netherlands—as a platform our services are typically provided to in-country borrowers and investors, meaning cross-border and trade complications are minimised. However, as the government looks to negotiate our future relationship with the European Union, we would like to highlight notable challenges around the small businesses we facilitate lending to and their ability to access capital, as well as the FinTech sector more broadly and its ability to attract talent from across the world.

 

Access to capital: ensuring small businesses can fund growth through Brexit and beyond

Since the 2008 financial crisis, online lending platforms have reduced small business dependency on bank lending, bringing more choice and competition to the market than ever before. These platforms play an important but underutilised role in stimulating the real economy by directly channelling finance to businesses that have an impact.

Governments can, and have, used platforms to stimulate the economy during periods of uncertainty. Six months after the EU referendum, the British Business Bank committed a further £40 million to UK small businesses through our platform, as a direct response to the uncertainty created for SMEs by the result of the vote. This investment was recognition of the efficiency of the direct lending model, and its ability to channel much-needed funds to the real economy. To date, more than £190 million has been lent to UK small businesses on our platform by the British Business Bank - earning more than £12 million in cumulative net interest for the taxpayer.

 

The British Business Bank has been a great success in funnelling funds to small businesses and encouraging other forms of finance since the last crisis. We stand ready to support the Government and against the backdrop of Brexit, and believe there are a number of ways they could help ensure small businesses continue to access the finance they need to grow. For example:

•         Increase the overall level of funding from the British Business Bank to small businesses through online lending platforms

•         Expand the ways in which the British Business Bank provides this funding. One example is by investing in small businesses through lending platforms by investing in private funds.

•         Extend the Enterprise Funding Guarantee scheme so online lending platforms can participate. This would encourage more direct investments into UK small businesses. Schemes of this kind disproportionately favour traditional high-street banks, which have not typically made good use of them for the benefit of small businesses

 

Access to talent: retaining the UK’s position as the leading global FinTech hub post- Brexit

The ability to rely on unrestricted access to a vast talent pool has allowed the UK to establish itself as a leading Fintech hub, attracting talent from the EU and across the globe. With that changing, there is an important need to both maintain the attractiveness of the UK to foreign nationals, and to have very clear and easy visa routes for the type of talent that we need to attract.

 

We’ve recently observed that people are more reluctant to relocate to cities and/or countries in the UK in comparison to the US, which is likely connected to Brexit. We are largely reassured by the further details from the UK Government on the new points-based immigration system, and welcome their commitment to suspend the cap on the number of people who can enter the UK via the skilled worker route, in addition to removing the resident labour market test. While they are committed to attracting the brightest and the best—as demonstrated by recent announcements of fast-track science and graduate immigration routes— we would urge the UK Government to consider ways of supporting high-growth companies to scale up, by introducing ways to fast track essential hires from overseas. In addition, our key asks are:

 

Maintaining the UK’s best-in-class regulatory regime

The UK’s FinTech sector is the most competitive and innovative in the world. This has been helped in no small part by the support of a positive regulatory environment, in which industry has been closely consulted and involved in the development of regulation that governs our sector. In the UK, Funding Circle and other peer-to-peer lending platforms are fully authorised by the FCA under a bespoke regulatory regime designed for the operation of an online lending platform. We regularly interact with our regulator to constructively shape the development of regulation which is robust, yet also fosters competition and innovation.

 

The FCA first introduced interim regulation of the peer-to-peer lending and equity crowdfunding sector in 2014, with three major UK platforms receiving full authorisation in 2017. As is normal with the regulation of any new industry, the FCA carried out a post-implementation review and, in close cooperation with industry, implemented a second round of regulation in 2019. For the most part this applied existing FCA regulations to peer-to-peer lending, with some bespoke enhancements and new rules. This iterative process has helped raise standards and protect consumers, while providing an environment that continues to foster innovation and promote competition.

 

While the regulatory journey of the European Union’s peer-to-peer lending sector is on a similar trajectory, it is at an earlier point than the UK’s. This is a reflection of the relative maturity of platforms in the UK and EU; the UK’s major peer-to-peer lending platforms have typically been trading for longer and are operating at significantly larger scale than those in the European Union. As a result, the European Crowdfunding Services Providers Regulation, the first set of EU regulations pertaining to the peer-to-peer lending industry that are set to come into force in 2021, does not account for how the business models of major UK platforms have developed over the past decade, and is better-suited to the wide range of business models found across the European Union.

 

Over time, platforms such as Funding Circle have developed discretionary lending models that allow them to operate at scale, ensuring that tens of thousands of investors are lending responsibly through mandatory diversification and the automatic allocation of loans to investors’ portfolios. At this point in time the proposed EU regulations are not designed with platforms operating at this level of scale in mind. As a result, we believe it is strongly in the interests of the UK’s peer-to-peer lending sector that it continues to operate under the FCA’s regulatory regime and that—at least in relation to our sector—the UK diverges from the European Union in this respect.

 

Conclusion

Funding Circle is proud to be a key player in the UK’s world-leading FinTech sector. At an exciting time for our sector, it is more important than ever that the UK looks to maintain its competitive advantage in financial services. As the UK Government looks to establish its future relationship with the European Union, we believe this can be done by continuing to promote a bespoke regulatory regime that has, and has continued to develop, alongside our sector. In addition our industry can be supported by continuing to be able to gain access to the talent it needs— no matter the source — and ensuring businesses are able to access the finance they need to grow.

 

March 2020